Former NYSE CEO Thain Says Stock Dark Pools Should Be Closed

CIT Group Inc. (CIT) Chief Executive
Officer John Thain, the former head of the New York Stock
Exchange, said there’s too much fragmentation and insufficient
transparency in the stock market.

“Dark pools” that allow for trading of stocks outside of
exchanges should be eliminated, Thain, 58, said in an interview
with Erik Schatzker and Stephanie Ruhle on Bloomberg
Television’s “Market Makers.” “The biggest problem is the
fragmentation, you can trade stocks in 50 different places.”

Thain’s view echoes that of his successor, NYSE Euronext
CEO Duncan Niederauer, who has decried the expansion of off-exchange equity trading. More than a third of all stock volume
is now executed off exchanges, according to data compiled by
Bloomberg.

The CIT chief said today that the markets owned by NYSE
Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ), which own the listing venues
for almost all U.S. stocks, should get to control when companies
trade. Reg NMS, developed when Thain ran the NYSE, mandates
shares must trade on whatever venue has the best price at any
given time, which has helped markets proliferate.

“There’s no transparency in most of those places,” Thain
said today. “That’s not good for the market, that’s not good
for retail investors.”

Thain joined the NYSE in 2004 from New York-based Goldman
Sachs Group Inc., which runs one of the biggest dark pools,
Sigma X.

Washington Meeting

Niederauer and his counterparts at Nasdaq OMX Group Inc.
and Bats Global Markets Inc. met in Washington in May and June
with lawmakers and the U.S. Securities and Exchange Commission
to discuss a rule that could divert more orders to exchanges
rather than trading in dark pools or within a broker’s
inventory.

Dark pools, which don’t publish bids or offers on shares,
were set up to allow large investors to trade big blocks without
having news of their orders move the price. NYSE and its peers
contend that the original rationale no longer applies because,
they say, the average trade size in dark pools has fallen to
about 200 shares. As a result, the private venues are becoming
less-regulated versions of traditional exchanges, they said.

SEC rules currently protect investors from receiving a
worse price than the best available bid or offer. The exchanges
want the SEC to pass a “trade-at” rule, which would require
brokers to route an order to an exchange unless they can improve
on the best public quote by a defined amount. Since Canada
imposed such a rule last year, quoted spreads and volatility
have fallen, the exchange’s CEOs told SEC Chairman Mary Jo White
during a presentation May 1.

Evaluating Impact

Brokers and operators of dark pools are trying to blunt the
lobbying campaign, saying there’s no evidence that off-exchange
trading hurts investors. Academic studies of fragmented markets
have come up with varying results. Some found that dark trading
is associated with wider bid-offer spreads on stocks and higher
levels of volatility, while others have concluded it’s
associated with lower transaction costs and better prices.

Officials from Morgan Stanley (MS) met in Washington May 22 with
SEC commissioners and staff, as well as Wall Street’s self-regulator, the Financial Industry Regulatory Authority. They
said a trade-at rule would reduce options for customers who want
to prevent orders from leaking to the rest of the market.

Niederauer made the case for new rules in an April 29
letter to NYSE-listed companies, saying that off-exchange
trading operates “with less regulatory oversight or
accountability.”

Finra Plan

Regulators approved a plan in July to require U.S. off-exchange markets such as dark pools to boost disclosure about
the transactions they handle. The board of Finra, the private-sector overseer of U.S. brokerages, will propose rules to the
government that would compel alternative trading systems to
disclose the amount of volume they handle for each stock.

In addition to dark pools, other trading happens in private
when brokers are paid to send their most profitable orders from
retail investors to wholesalers, which handle the transactions
within their own inventory. Brokers say the practice allows them
to give retail investors slightly better share prices, as well
as research reports and insurance against technology
malfunctions and order errors.